A Day in the Life of an Options Trader at a Bulge Bracket Bank: From Delta to Vega and Back Again

This is a guest post from “DerivsTrading,” an experienced options trader who has worked at both bulge-bracket banks and hedge funds in London. He defied the odds and broke into sales & trading coming from a non-target school.

We’ve covered a few days and 48-hour periods in the lives of sales & trading interns before, but what about when you start working full-time?

Even if the hours and stress levels are still brutal, do you at least get to do more “real work”?

Or are you stuck picking up lunch for everyone on your desk?

Let’s jump into this day-in-the-life account and see exactly what you do as a full-time options trader at a bulge bracket bank – and hey, you might even improve your knowledge of the Greek language in the process…

Early Risings

5:45 AM: Wake up. No matter which desk you end up on, you are most likely going to be waking up around this time.

Adjust your sleeping habits accordingly or suffer for most of the day. Also keep in mind that even if you go out the night before, you are still expected to be in on time and alert. Any signs that you are at less than 100% capacity will be looked upon very badly.

6:30 AM: Arrive on the desk. The market opens in 90 minutes, so it’s really a countdown from here. 20 minutes is spent just turning on all the systems; with 4 computers and each one running 10-15 different applications, this is quite time-consuming.

Inevitably, you’ll forget to log into at least one crucial system each day and then realize it at the absolute worst moment.

6:50 AM: Start reading various new sources – generally FT, Bloomberg, City AM, and then the internal research that comes out. Finish off with a couple broker chats.

You need to know, before the open, any market information that can affect your stocks – how it might affect your P&L and what the Cash Equities Traders are calling it that day (most cash traders after a big piece of news will call a stock up or down x%).

7:15 AM: Look at the largest positions on the book and try to come up with a rough game plan for the day. I generally like to make a list of risks I don’t like, in order of priority, and then work down the list throughout the day.

You want to make sure you know the biggest risks in every category (e.g. gamma, vega, delta, decay, skew, div).

NOTE FOR NON-TRADERS: These metrics all measure characteristics of options; for example, delta is the rate of change of the option value relative to the changes in the underlying asset’s price (basically the first derivative with respect to price).

Vega is the first derivative of the option’s value with respect to the underlying asset’s volatility; gamma is the second derivative of the option’s value with respect to underlying asset price (so the first derivative of delta).

Unlike in investment banking, you actually need to know (some) math here.

In a large options book there is also a lot of “hidden risk.”

Therefore, you can’t just look at your overall risk for a name – you need to know where your largest strikes are, and how your risk changes through spot and time.

For example, you might see yourself long gamma, but actually you might be short a strike that expires in 2 weeks that is 10% away.

You need to know about all of that because if the stock makes a big move, that strike will start kicking out a very large short gamma (this is also why most traders are unwilling to sell short dated OTM options).

Morning Meetings: The Worst Time to Show Up with a Hangover?

7:30 AM: Morning meeting with sales and research, which is generally the worst moment of your entire day if you have had a rough night out. The macro summary is given, and then everyone discusses important research updates.

7:50 AM: Take one final glance over the stock news to make sure you haven’t missed anything just before the open (which is at 8 AM in London and a few other regions).

You never want your boss to ask you a question that you don’t have an answer to: if you’re running risk, you need to be aware of everything at all times.

8:00 AM: The market opens. You watch any big movers, see that cash equity prices find their levels fairly quickly but volatility (vol) levels adjust a bit more slowly; generally, within the first 10 minutes you get an idea of where vol is on most names.

If there are earnings or big announcements, you will generally not quote until the screens come in a bit. For the first 10 minutes, the vol spread will be extremely wide and you can easily get picked off.

8:15 AM: First wave of client requests comes in. If you cover several sectors, you can get a backlog of 7-10 prices pretty quickly.

You prioritize all these requests by client and size; even when you only have a couple minutes for each price, you need to make sure you have all your bases covered.

Options trading is very tricky because there are so many different risks – you need to make sure you’re not being picked off on vol (check if anything similar in the broker market is already trading to hedge your risk and skew pricing accordingly), make sure you’re not being picked off on divs, and make sure that you can find borrow on the stock if you’re selling shares as part of the trade.

If the government steps in and restricts short-selling for some reason, this last risk can become more of an issue.

US vs. European Options

8:30 AM: Finally send off last of the prices, get some time to look at how the book is doing, and start phoning up brokers and start working some trades.

Options on single stocks in Europe trade a bit differently than in the US because the liquidity is not the same – the issue is that screen prices are kept very tight in extremely small sizes, and clients expect the same spreads in sizes that are 50x larger.

But the problem is that unless you can find someone to find the other side in the broker market, you will get wider prices with brokers than you give to your clients.

This means that to survive, you constantly need to be aware of what brokers are working so that you can spot chances to offload risk.

That way, when a client request comes in you can skew it appropriately. The best case scenario: when you know someone is a buyer in the broker market, you can buy it from a client at a vol from mids, and then offload it in the broker market at a vol above.

However, this is very rare, so most of the time you need to make a price based on a prop view (if you will). You need to price it according to your view of the trade, instead of where you can offload it.

9:15 AM: Things start calming down around this time, and you might chat with co-workers or use the time to go for a bathroom break.

Always go when you have a chance and not when you need to – nothing distracts you more than having to go to the bathroom when you’re in the middle of something.

10:00 AM: It’s still fairly quiet, so you finally get to fire up Excel and work on some longer-term projects. It gets difficult on a flow book because you need to find the balance between looking after the risk, but at the same time also exploring opportunities to move the business forward.

It’s sort of like the dilemma mid-level bankers face in executing deals vs. sourcing new business when moving up the ladder…

10:15 AM: Spoke too soon – a big client request comes in, and it’s a good client so the price needs to be very competitive.

This is a double-edged sword: you can take a lot of P&L upfront on the trade, but you know that getting out of the position is impossible and will take a couple weeks. So you price it with the help of the senior guys on the desk and get back to Excel.

12:00 PM: A company you’re following announces a profit warning – unfortunately, you have a short gamma position and the stock is down 5%. This is one of the situations you hate to be in.

NOTE: This is bad news because gamma is the second derivative of an option’s value with respect to the underlying stock price… so if you’re long gamma, you benefit from stock price movement, and the bigger the better. If you’re short gamma that hurts you because you’ve bet against stock price movement and now the stock has just made a big move.

Because of the short gamma, you are long a lot of delta.

Do you sell the shares 5% down, or hold on and hope it rallies back?

As a personal rule, I like to keep my delta’s from my short gamma’s to a certain limit, and I hedge so that it never crosses that limit.

You do not want to be stuck with a stock that drops 20% in a day and just sit there watching it. It’s important that you know everything about your short gamma’s, more so than your long’s, because if something gaps down you need to know the impact on your P&L and delta.

With longs it’s fine because of the positive P&L, but negative P&L always brings more senior attention and means that you’re more likely to get questions on what you’re doing.

You also need to make sure you know not just your local risk, but also your risk as spot prices move.

In a client flow book you have thousands of positions, so your risk can quite easily flip as parameters move. That is why you need to look at your risk in three dimensions: time, spot, and volatility.

These added dimensions make derivatives more interesting than delta one products (e.g. futures, forwards, or anything else with a linear, symmetric payoff profile), but also harder to risk-manage.

12:30 PM: The stock has calmed down so you get back to Excel, keeping an eye on the chart in the corner of the screen in case there’s any follow-up movement.

1:30 PM: You attend an IT meeting for 30 minutes, where you’re really just listening to updates on various projects that they’re working on for trading desks.

2:00 PM: You get back to the desk to find 10 prices waiting for you. Lock back into the cockpit.

Pricing becomes routine after a while. This can become dangerous, especially with very small requests.

You have to make sure that for every single price, you are very rigorous in assessing all the different risks; you can easily get picked off because you missed an announcement in a company conference call that dividends were being changed or restructured, for example.

3:00 PM: You have a big short gamma expiry today that is OTC and has just rallied close to the strike. Pin risk is very real.

The stock is trading just above the strike and you are fully hedged, which means that if it dips below, the delta flips from 0 to 1 (or 1 to 0 but it has the same effect), so all of a sudden you get very long delta if it’s a sizeable position.

A long delta position isn’t a problem if the stock stays near that strike, but it could then drop 3% and you would lose quite a bit in that scenario.

However, if you sell shares and it comes back up through the strike you get short a lot of delta. This situation gets even worse if the stock is illiquid and you get long/short several times the daily volume.

Your choices are very limited at these times, and you need to be aware of the strike risk days or weeks leading up to the expiry so you can plan accordingly.

4:00 PM: You slowly start hedging the smaller delta positions on the book so you can spend the last 15 minutes focusing on the 10-15 large positions and expiries.

This is one of the most hectic times of the day, as you need to hedge quite a large percentage of daily volume for a lot of stocks.

In addition, several prices come in for clients, and you are trying to finish off some stuff you have been working in the broker market.

On a standard day there are 20-30 things you need to be on top of, and so mentally it does stretch you a bit. Another tricky thing is that different markets close at different times of the day, so you can’t necessarily stop paying attention or finish up right away as soon as the market of the city you’re in closes.

4:35 PM: The markets close, so you finish off all outstanding bookings before running the final P&L for the day.

Technically, your day is done once you submit the P&L, but you normally stay until 6 PM to work on your longer-term projects and think about new trade ideas.

It’s the only time of the day where you don’t need to monitor something, so it’s actually the most productive time for “new business generation” as well.

6:45 PM: Wrap things up and head home.

This is a guest post from “DerivsTrading,” an experienced options trader who has worked at both bulge-bracket banks and hedge funds in London. He defied the odds and broke into sales & trading coming from a non-target school.